December 3, 2012 / 9:11 PM / 5 years ago

TEXT - S&P rates

     -- U.S. online media company is proposing to issue a
new $720 million senior secured credit facility and $300 million senior
unsecured notes to fund a leveraged buyout.
     -- We are assigning the company our 'B' preliminary corporate credit 
rating. The outlook is stable. We are also assigning the senior secured credit 
facility a 'B+' preliminary issue-level rating with a preliminary recovery 
rating of '2', and assigning the unsecured notes a 'CCC+' preliminary 
issue-level rating with a preliminary recovery rating of '6'.
     -- The stable outlook reflects our expectation that leverage will 
steadily decline, and the company will continue to generate meaningful 
discretionary cash flow, and maintain adequate liquidity.
Rating Action
On Dec. 3, 2012, Standard & Poor's Ratings Services assigned Provo, Utah-based 
online family history resources provider its 'B' preliminary 
corporate credit rating. The outlook is stable.

At the same time, we assigned's proposed $720 million senior 
secured credit facilities our preliminary issue-level rating of 'B+' (one 
notch higher than our 'B' corporate credit rating on the company), with a 
preliminary recovery rating of '2', indicating our expectation for substantial 
(70% to 90%) recovery for lenders in the event of a payment default. The 
facility consists of a $50 million revolving credit facility due 2017 and a 
$670 million term loan due 2019.

We also assigned's proposed $300 million senior unsecured notes 
due 2020 our preliminary issue-level rating of 'CCC+' (two notches lower than 
our 'B' corporate credit rating on the company), with a preliminary recovery 
rating of '6', indicating our expectation for negligible (0% to 10%) recovery 
for lenders in the event of a payment default. plans to use the 
aggregate debt proceeds, along with $686 million of equity, including new 
equity contributed by Permira Advisers and rollover equity from Spectrum 
Equity and management, to finance the $1.6 billion acquisition.

The 'B' preliminary rating reflects the company's aggressive financial profile 
and narrow business focus. We view the company's business risk as "weak" as 
its reliance on one website for the majority of revenue and EBITDA and need to 
replenish its customer base offset its leading market position and solid 
EBITDA margin. Pro forma for the transaction, leased-adjusted leverage is 6.3x 
and EBITDA coverage of interest is 2.4x. In our view, the company's financial 
risk profile is "highly leveraged." We view's management and 
governance to be "fair." is the global leader in the commercial market for online family 
history research. The company's main website,, has over 2 million 
subscribers and accounts for 90% of revenue. Subscribers pay around $19 per 
month on average to research their genealogy and build a family tree. has digitized and indexed billions of records making it easier 
for users to discover new information. The company also generates revenue from 
other websites such as, which serves more value-oriented 
consumers; AncestryDNA, a DNA testing service; and Family Tree Maker desktop 
software. generates about three quarters of its revenue in the 
U.S., 12% from the U.K., and the rest from Australia, Canada, and Sweden. The 
company has recently acquired content from Ireland and Germany. Additional 
content provides an incentive for current subscribers to continue using the 
service and could also provide the foundation for a local service to be 
launched in new countries. We believe that launches in new countries are 
likely, but not immediately on the horizon as it takes time to acquire and 
process enough content to start a service. We view the company's collection of 
records as providing a meaningful barrier to entry.

The company's monthly subscriber churn has historically ranged from 3.3% to 
4.8%. During the 12 months ended Sept. 30, 2012, churn was 3.7%. We view 
customer relationship management, and churn specifically, as a significant 
risk to manage, given the highly discretionary nature of the service and the 
customer time commitment involved. Marketing and advertising is the company's 
largest operating expense. The average subscriber acquisition cost has climbed 
over the past few years and we believe could continue to grow, despite a 
decline in SAC during the third quarter of 2012. exhibited strong 
growth through recent periods of economic weakness, however, in our opinion 
maintaining its high growth could be difficult. The company benefitted from 
the NBC series "Who Do You Think You Are?," which aired for three seasons but 
was canceled in the spring of 2012. The company estimates that this show led 
to 100,000 gross subscriber additions per year (about 8% of total 2011 gross 
subscriber additions).

Under our base-case scenario for 2013, we expect revenue to grow at a 
high-single-digit percentage rate with subscriber growth of 8% to 10% and 
essentially flat average revenue per user. EBITDA, as a result, should grow 
10% or more based on slower growth in personnel costs. We expect that churn 
will increase slightly and that subscriber acquisition costs will continue to 
grow. By the end of 2013, lease-adjusted leverage should fall to the mid- to 
low-5x range (compared with 6.3x pro forma for the LBO) and interest coverage 
should rise to the high-2x area (compared with 2.4x pro forma).

In the third quarter of 2012, revenue grew 24.5% and EBITDA grew 28%. 
Subscription revenues grew 21% as the number of subscribers increased 19% 
while average revenue per user in the quarter was flat compared with the 
period a year earlier. Product and other revenue grew 88% due to additional 
revenue from the Ancestry DNA product, launched in the second quarter of this 
year. For the 12 months ended Sept. 30, 2012, the EBITDA margin was 30.8%, 
consistent with level of the year-earlier period.

Working capital has been a source of cash as customers pay upfront for 
subscriptions. During the 12 months ended Sept. 30, 2012, spent 
roughly 13% of EBITDA on capital expenditures and a slightly higher proportion 
on content acquisition, which mainly consists of the cost of digitizing and 
indexing historical records. During the same period, the company converted 75% 
of EBITDA to discretionary cash flow. In 2013, we expect conversion of EBITDA 
to discretionary cash flow to fall to about 30% due to increased interest 
expense as a result of the leveraged buyout.

We believe that has "adequate" liquidity to cover its needs over 
the next 12 to 18 months. Our view of the company's liquidity profile 
incorporates the following assumptions and factors: 
     -- We expect sources of liquidity over the next 12 months to exceed uses 
by over 1.2x. 
     -- We would expect net sources to remain positive, even if EBITDA were to 
decline by 15%. 
     -- is likely to maintain covenant compliance, even with a 
15% decrease in EBITDA.
     -- In our view, can absorb low-probability, high-impact 
Pro forma for the transaction, sources of liquidity will include $25 million 
cash, an undrawn $50 million revolver, and an expected $60 million of 
discretionary cash flow in 2013. Uses include an expected $45 million of 
spending on capital expenditures and content acquisition. There are no 
significant maturities over the next five years. Amortization on the term loan 
is 1% per year and there is a 50% mandatory excess cash flow sweep with 
leverage based step-downs. will have a net secured leverage covenant that only applies when 
more than $15 million is drawn on the revolving credit facility. We expect the 
company will have a sufficient margin of compliance over the intermediate term.

Recovery analysis
For the complete recovery analysis, please see our recovery report on, to be published on RatingsDirect following this release.

The stable outlook reflects our expectation that leverage will steadily 
decline, and that the company will continue to generate meaningful 
discretionary cash flow and maintain adequate liquidity. We could raise the 
rating over the intermediate term if the company is able to lower leverage to 
less than 5x while maintaining its EBITDA margin and continuing to grow 
revenue. This could occur if EBITDA grows by 20% during 2013 and debt falls by 
$15 million.

Although less likely over the intermediate term, we could lower the rating if 
leverage rises above 7x or discretionary cash flow falls significantly. This 
would likely be the result of deterioration in operating performance including 
an increase in churn and higher subscriber acquisition costs.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List
New Rating Inc.
 Corporate Credit Rating                      BB (prelim)/Stable/--
 Senior Secured
  $50M revolving credit facility due 2017     B+ (prelim)
   Recovery Rating                            2 (prelim)
  $670M term loan due 2019                    B+ (prelim)
   Recovery Rating                            2 (prelim)
 Senior Unsecured
  $300M notes due 2020                        CCC+ (prelim)
   Recovery Rating                            6 (prelim)

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